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Asset-Price Collapse and Market Disruption - A model of financial crises -

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  • KOBAYASHI Keiichiro

Abstract

We construct a search-theoretic model � la Lagos and Wright (2005), that has multiple steady-state equilibria, one of which may be interpreted as a state of financial crisis. The key ingredient is the collateral-secured loan in the decentralized matching market, in which the borrowers must put up their own land as collateral. They borrow debt for intertemporal smoothing of the consumption stream and also for factor payment in production. In the crisis state, the land price is low and the debt for factor payment, i.e., liquidity, dries up. Facing a liquidity shortage, all sellers choose not to participate in the matching market and the market is shut down due to the search externality. This market disruption lowers the aggregate productivity, while the low productivity justifies the low asset price in turn. We may be able to derive a policy implication that collective debt reduction by government intervention may solve the coordination failure and bring the economy out of the crisis equilibrium.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 09045.

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Length: 34 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:eti:dpaper:09045

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  1. Lee E. Ohanian, 2002. "Why did productivity fall so much during the Great Depression?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  2. Timothy Kehoe & Edward Prescott, 2002. "Data Appendix to Great Depressions of the Twentieth Century," Technical Appendices kehoe02, Review of Economic Dynamics.
  3. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  4. Jermann, Urban & Quadrini, Vincenzo, 2006. "Financial Innovations and Macroeconomic Volatility," CEPR Discussion Papers 5727, C.E.P.R. Discussion Papers.
  5. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland.
  6. KOBAYASHI Keiichiro & NAKAJIMA Tomoyuki & INABA Masaru, 2007. "Collateral Constraint and News-driven Cycles," Discussion papers 07013, Research Institute of Economy, Trade and Industry (RIETI).
  7. Enrique G. Mendoza, 2006. "Endogenous Sudden Stops in a Business Cycle Model with Collateral Constraints:A Fisherian Deflation of Tobin's Q," NBER Working Papers 12564, National Bureau of Economic Research, Inc.
  8. Makoto Watanabe & Leo Ferraris, 2007. "Collateral Secured Loans in a Monetary Economy," 2007 Meeting Papers 121, Society for Economic Dynamics.
  9. Keiichiro Kobayashi & Kengo Nutahara, 2007. "Collateralized capital and news-driven cycles," Economics Bulletin, AccessEcon, vol. 5(18), pages 1-9.
  10. Timothy J. Kehoe & Edward C. Prescott (), 2007. "Great depressions of the twentieth century," Monograph, Federal Reserve Bank of Minneapolis, number 2007gdott.
  11. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  12. Keiichiro Kobayashi, 2004. "Payment Uncertainty, the division of labor, and productivity declines in great depressions," Discussion papers 04037, Research Institute of Economy, Trade and Industry (RIETI).
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